Posted by Brent_IL on November 19, 2000 at 24:33:09:
He might appreciate a junior mortgage in addition to the bonds. A loan schedule of 10-12 years will result in high monthly payments. Are you sure you have considered all expenses and contingencies when determining that the net income will make the payments. You said you would try to keep the payments current. When your using someone else’s money that commitment is not strong enough. He knows he cannot look to you for repayment, because if you had any money you wouldn’t be going to him.
Your friend would be making the loan because he is your friend, not because of the bond collateral. You need to have a back-up plan to return his money, and a fail-safe plan if the back-up doesn’t work.
The zero bond idea was popular in the late 1970s. Interest rates were 16, 17, and 19%. Money would double in a short time.
That was then, and this is now.
I would suggest making none-of-your-money-down purchases, and use your friend?s money for emergencies. You could place some as an earnest money deposit with a Realtor to gain credibility. I have used zeros and discounted corporate bonds to make CRE deals fly. I’ve also used them when substituting collateral, sometimes at the closing table. On the initial buy it was necessary to have an unsophisticated seller and a real estate agent that didn’t want to appear unknowledgeable or simply wanted to get paid. Unless, the buyer’s situation is desperate, no lawyer would allow his client to agree to an offer containing discounted bonds unless the purchase contract was already written in stone.
Regarding your friend, one approach would be to contact a bond broker (any bond department, fees are almost standardized) for a rated corporate bond that is deeply discounted, but not about to default soon (due diligence). Might have a low coupon rate. Tell your friend, “I’ll give you $30,000 in corporate bonds as collateral for my payments. These bonds aren’t worth that much today, but they grow in value everyday (nearer to call date.) You can even keep the 1.25% interest that they pay every six months in addition to my monthly payments to you.” Many times this is more acceptable because taxes are payable on the zero’s build-up, but no cash is received to pay them.
As with most CRE techniques, the risk is highest for the one who is putting up cash or property. You have a good friend if he is willing to give you $30,000 to play with. Are you willing to lose that friendship if the deal heads south? Been there, done that. It?s not good. Ensure the deal works.